Greek carrier DryShips
sold vast sums of discounted shares to an offshore firm and propped up
prices with ‘reverse splits,’ sending investors on a wild ride that, for
many, ended with steep losses

When a company’s stock drops 99.9% in six months, there’s
probably a story there. When, despite that carnage, the company’s assets
double during the same period, even more so.
And when 1.68 million of the company’s shares held early last year equal exactly one share today, well, what is going on?

The locus of these bizarre doings is
DryShips
Inc.,
DRYS 5.23%
a Greek carrier that has been tracing one of the wildest rides in
recent stock-market history, causing half a billion dollars of traders’
money to vanish and, it appears, making two wealthy men wealthier.

DryShips’ shares occupy a murky world of tiny stocks where
information is limited and investors often bet on short-term moves.
Worth barely $5 million on the stock market in early November, the
company became a hot topic on stock discussion boards when its shares
suddenly leapt 1,500% in four trading days.

That the company had
just disclosed a huge loss and suspended debt payments “to preserve cash
liquidity” evidently didn’t matter to buyers who wanted in while the
stock was on fire.
But even as they were buying, the company was
creating vast numbers of new shares. These it was selling at a discount
to an obscure British Virgin Islands firm, which was quickly unloading
many or all of the new shares.

Immediately after the stock’s soaring November flight, it plunged back to earth.
Since
then, DryShips has repeatedly printed huge numbers of new shares and
sold them to the British Virgin Islands firm, on such a scale that
virtually every share in existence today has been created since
November.

In an apparent effort to counter the downward pressure
that this new supply of shares put on the price, DryShips used another
technique: reverse stock splits.

In a typical stock split, a
company whose share price has grown high makes the stock more affordable
by giving investors two or more shares for each one they hold. The
price of each share becomes lower, but an investor’s proportional
ownership of the company doesn’t change.

In a reverse split, a
company with a very low share price forces it higher by making each
share represent a larger piece of the company.

On Nov. 1, for example, DryShips did a 1-for-15 reverse split. A holder
of 15 shares now had just one, but that one share would have a higher
price—roughly 15 times the price of one before the split.

Behind these maneuvers were two men with seemingly little in common.
One is
George Economou,
DryShips’ founder, chairman and chief executive, a resident of
Athens who also owns a private fleet of some 100 ships and has gained
notice in the art world for his collection of German expressionist
paintings.

The other is
Marc Bistricer,
a member of Toronto’s tightknit Orthodox Jewish community and a
man with almost no public profile. One of the rare media mentions of him
was a 2015 report by broadcaster CBC on a rundown Ontario apartment
building owned by a company that lists him as an officer and director.
Neither man responded to requests for an interview.

The DryShips
saga began early last year when a British Virgin Islands firm called
Kalani Investments Ltd. began approaching companies in the
ocean-shipping business with a radical idea to help them raise money.

Many
companies could use help in that hard-hit industry, including those
such as DryShips that operate “dry bulk” ships carrying goods such as
coal and ore. A glut of such vessels drove shipping rates to a
multi-decade low in February 2016.

Kalani’s idea was that it
would buy newly issued shares directly from the shipping companies at a
discount to the stock-market price, thus injecting cash into the
companies. Executives of three Greek shipping companies described such
an approach by Kalani. All three said Kalani was controlled by Toronto’s
Mr. Bistricer.

Among the three executives approached was
Anthony Kandylidis,
DryShips’ chief financial officer. He is a nephew of Mr.
Economou, the founder of DryShips, which has offices in Athens but is
domiciled in the Marshall Islands. The CFO said he met with Mr.
Bistricer in New York a little over a year ago about helping DryShips
raise capital.

On June 8, 2016, DryShips sold Kalani securities
convertible into $5 million worth of new DryShips common shares, which
was equivalent to a little under 10% of the shipping company’s market
value then. It was a small foretaste of what was to come.

Kalani
didn’t report a 5% or more stock ownership, as U.S. regulations require,
indicating it rapidly sold many of these new DryShips shares. And in
succeeding weeks, DryShips’ stock tumbled.

By September,
DryShips was preparing paperwork to do two things: execute a reverse
stock split and issue a far larger batch of securities to Kalani.

Issuing
so many new shares would normally be unrealistic for a company with a
tumbling stock, but on Nov. 9 DryShips’ stock suddenly tripled, ending
the day up 133%.
Nasdaq
temporarily halted trading four sessions later with the stock up 1,500%.

What caused the giant rally is unknown; there is no evidence Kalani, DryShips or their principals took any steps to trigger it.

When
trading resumed two days later, DryShips announced it was selling a
second batch of securities to Kalani—securities the offshore firm could
convert into $100 million of new DryShips common stock.

That was nearly 20 times what the entire company was worth before its stock’s mysterious rally.
DryShips
gave no information about Kalani in securities filings or public
statements when it sold the firm shares, except to say that Mr. Economou
wasn’t affiliated with the firm. Details of Kalani’s ownership are
protected by secrecy laws in the British Virgin Islands.

Despite
this extreme common-stock dilution, Mr. Economou was in no danger of
losing his control of DryShips. Just two month earlier, he had converted
some loans to the company into a new class of preferred shares that
carried 100,000 votes apiece. Through other companies he controls, he stood to benefit from the share deluge.

DryShips shares by this time were plunging, thanks to the news that many more of them were being created.

Even so, investor chat rooms lit up with speculation that another epic rally could be in store, given
the sudden inflow of cash to the company’s coffers. Mentions of
DryShips on an investing site called StockTwits, which had totaled only
about 77 a week before the November rally, soared to an average of about
18,000 a week over the following four months.

The enthusiasm
allowed DryShips to create and sell still more shares. In three
additional deals with Kalani, the shipper agreed to sell it securities
convertible into $626.4 million of new DryShips common shares.

That was equal to about 100 times DryShips’ stock-market value in early November.
To
keep its stock price from falling below $1, necessary to avoid
delisting, DryShips kept doing reverse stock splits—not only one on Nov.
1 but also one on Jan. 23, one on April 11, one on May 11 and one last
month, on June 22. All had the approval of Nasdaq, where the stock
trades....MUCH MORE